Introduction
Many expenses facilitate the functioning of a business, and SG&A expenses form a significant portion of them. SG&A costs are the selling, general and administrative expenses of a business. These are all the costs involved in everyday operations and incurred while marketing and selling a product.
These costs are not directly related to the manufacturing, production and of the products or services but are used to facilitate the business processes and day-to-day operations.
What Are Selling Expenses?
Selling expenses are all the costs incurred to facilitate the sales of goods or services. These include not just the direct costs of sales but also the sales-supporting expenses like marketing, PR, advertising, etc. Selling expenses can be divided into distribution, marketing and final sales costs.
Selling expenses are different from the cost of goods sold. Cost of goods sold (COGS) is total the amount of money spent to acquire raw materials required to make a product and the development, production, manufacturing and designing costs.
Learn how to calculate selling expenses here.
Direct and Indirect Selling Expenses
You can classify selling expenses into two categories: direct and indirect.
What are direct selling expenses?
Businesses incur direct selling expenses after the sale of a product or service. These expenses are primarily variable, and their total amount depends on the number of goods sold. The following expenses can be classified as direct selling expenses.
- Commission on sales
- Packaging of goods
- Shipping
- Cost of transport and delivery services
What are indirect selling expenses?
Businesses incur indirect selling costs before the sale of the products. These costs can be all sales-enabling expenses like-
- Marketing and sales personnel salaries
- Content development
- Social media management and marketing
- Website development and maintenance
- Certain travel expenses
- Branding
- Public relations
- Events marketing and management
What Are General and Administrative Expenses?
General and administrative expenses or G&A expenses are costs that facilitate the everyday operations of a company. They do not directly fund a specific department like sales or manufacturing but rather support activities essential to all functions and departments.
General and administrative costs support the overall functioning of a company. They are a part of the operating expenses of the company. Most salient general and administrative expenses include-
- Rent
- Administrative staff salaries
- Utilities
- Insurance
- Legal fees
Difference between operating expenses and SG&A Expenses
SG&A expenses are a subset of the operating expenses. Although, in some cases, the two terms are used interchangeably as both include costs not involved in manufacturing, certain operating expenses cannot be categorised as sg&a expenses. Some of these expenses can be research and development fees or depreciation.
You can learn more about operating expenses here.
Benefits of Managing SG&A Expenses
Insight into the financial standing of the business
Sg&a costs form a significant component of a company’s expenses and play a crucial part in the overall profitability of the company. Tracking, calculating and analysing them is instrumental in calculating the business’s net income. Knowing the net income is essential to understanding the company’s overall financial standing.
Gives insight into the performance of departments
Analysing sg&a expenses closely also helps you gain insight into the performance and efficiency levels of the company’s departments. You can calculate the return on investment per department by analysing selling expenses. It also shows you the short-term requirements of each department and function. This can help you make the right decisions during resource allocation and budgeting.
Savings
Closely tracking and analysing sg&a expenses can help you identify the expense areas that yield the lowest returns or lead to wastage. You can weed out these expenses or replace them with better-optimised options to increase the savings for your business.
How to Calculate and Measure SG&A Expenses
Step 1: Identify the sg&a expenses
Different organisations have different criteria when it comes to sg&a expenses. Discuss the costs with the accounting team and decide which line items will be classified as sg&a expenses.
If a spend meets the following criteria, it can be included as a sg&a expense.
- It is a cost unrelated to the manufacturing, production or development of goods.
- It is a salary expense for employees involved in non-production and manufacturing roles like IT department, marketing, sales, accounts, HR, legal, etc.
- It supports the overall functioning of a business like office rent, insurance, technology and infrastructure.
- It enables the final sales of goods.
- It is not an indirect or non-operational expense like interest incurred, lawsuit settlement or inventory write-off. (Learn more about non-operating costs here).
Step 2: Categorise sg&a into fixed and variable expenses
Divide every sg&a expense as fixed or variable expenses. Fixed expenses include salaries, rents, utilities, etc., while variable expenses can be sales commissions, certain marketing costs, equipment etc.
Step 3: Add the expenses and calculate the sg&a ratio
Add all the selling, general and administrative expenses and then divide the sum by your total sales for the specific period.
This ratio will tell you the percentage of money earned by the company used for sg&a costs. As the sg&a ratio increases, it becomes more and more difficult for businesses to sustain their profits. This is why sg&a expenses are often considered for reductions.
How to Reduce SG&A Expenses
Every company wants to reduce cash outflows to increase its profit margins. Naturally, SG&A expenses are not exempt from budget cuts.
During mergers and acquisitions, sg&a is often the first cost that comes under scrutiny and goes under the knife to boost profits.
How to reduce selling expenses
Reducing selling expenses requires careful planning and detailed analysis of selling expenses up till the current quarter. To analyse the returns vs cost value of any department or function, you must first quantify performance. For example, you can measure the performance of a digital marketing team by looking at websites, social media KPIs, and inbound leads generated etc.
It is essential to acquire information about multiple cost dimensions and not rely on guesswork while analysing selling expenses. While setting a budget, ensure you have incorporated insights from your analysis, industry standards, and customer lifetime value.
Travel expenses also comprise a significant part of selling expenses. You can optimise travel expenses using intelligent travel and expense management software that can improve reimbursement processes, reduce fraud and increase savings by increasing policy compliance.
Happay’s travel and expense management solution is one such platform that offers end-to-end travel management solutions.
How to reduce general and administrative expenses
Most general and administrative expenses are fixed costs, and reducing them without affecting the overall functioning of revenue-producing business areas can be tricky.
However, consolidating your expense management systems, frequent auditing, regular identification, and eliminating bottlenecks can reduce administrative expenses. Another way to reduce administrative costs is to ensure that utilities are not wasted. If employees misuse electricity and phone charges alone can accumulate into mammoth bills.
Explore various administrative and HR software that offers automation. Automation can improve organisational efficiency, boost employee productivity and, in turn, save on HR and administration salaries.
Accounting for SG&A Expenses
The company’s income statement accounts for selling, general, and administrative expenses. These costs do not correspond to specific goods and services and are not clubbed with the cost of goods sold.
Some businesses can account for sg&a and operating expenses together, while some may put sg&a as a part of operating expenses.
How to Forecast SG&A Expenses
SG&A forecasting can be done by three methods: as per cent of revenue from sales, fixed value, and growth rate applied over the last period.
To predict sg&a cash outflows, you can estimate the individual components. Most fixed costs remain constant or increase predictably, like rent, salaries etc. Most administrative costs like technology, utilities etc. can also be estimated, inflated and planned.
The variable sg&a expenses like sales commissions and shipping costs are a little tricky to estimate, but the analysis of previous quarters can give an insight into the approximate spending. Based on previous data, customer acquisition, retention and entertainment costs can also be approximated. However, variable costs can not be estimated to accuracy and can always be subject to change.
The Importance of Expense Tracking Software
Analysing and calculating the selling, general and administrative costs is imperative to the financial health of a business. So far, we have learned how to calculate, forecast and analyse the sg&a costs.
However, these forecasts and analyses start leaning towards inaccuracy when expense data gets contaminated because of manual processes. This can lead to errors during critical decision-making and budgeting processes. To avoid that, it is crucial for businesses, especially large companies, to adopt and deploy expense tracking software.
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